Inflation in France and Italy has accelerated faster than expected, and the pressure on the ECB to raise interest rates is heating up again

The Zhitong Finance App learned that the inflation data for France and Italy have completely exceeded expectations, causing the pressure on the ECB to continue to tighten monetary policy has increased significantly. Prices in France rose 3.4% year on year, the fastest in more than two years; Italy rose 4.1%, the highest since 2023. Energy is still the main driver. The day before, Spain announced an inflation rate of 5%, more than double the ECB's 2% target; German regional data also indicated a clear rise in national inflation.

Eurostat will release overall Eurozone inflation data for 21 countries on Friday. Economists expect overall inflation to rise to a three-year high of 3.7%. This expectation means that inflation in the Eurozone did not fall as fast as policymakers hoped, but instead accelerated again under energy shocks.

The Middle East conflict continued for seven months, driving oil and gas costs to soar and continuing to spread to the European economy. The ECB has raised interest rates twice, raising borrowing costs to 2.5%, and the market expects to raise interest rates by 25 basis points nearly four times in the next year. ECB President Lagarde on Monday supported “a prudent response where appropriate to control inflation,” but warned that a global bond sell-off would curb prices and growth. This statement shows that the ECB is trying to balance anti-inflation with steady growth.

Judging from French data, price pressure still mainly comes from energy. Energy prices rose 21.2% year on year in September, in line with ECB policymakers' judgment that “the second round effect has yet to be seen.” However, it is worth noting that inflation in the French service sector accelerated from 1.9% to 2.2%, and food inflation rose from 1.1% to 1.5% due to a jump in the cost of fresh agricultural products. This means that the energy shock may be gradually spreading to the service and food sector. If this trend continues, it will be more difficult for the ECB to switch to easing.

The bond market has responded. French treasury bonds recovered their gains. The yield premium on 10-year treasury bonds increased by 1 basis point to 120 basis points compared to German treasury bonds, the highest since 2012. However, this trend is mainly related to France's financial difficulties. The increase in inflation in France is lower than in similar European countries, partly because nuclear power accounts for a large share of its energy supply, and the economy is being dragged down by heatwaves and political and budget uncertainty.

Overall, the latest signals from France, Italy, Spain, and Germany suggest that Europe's inflation rebound is expanding. Energy prices are still the core driver, but rising service and food prices have increased the risk of inflation spreading to a wider range of sectors. For the ECB, the pressure to continue to raise interest rates is increasing; for the market, bond sell-off, fiscal risk, and slowing growth are creating multiple constraints. The risk of stagflation in the Eurozone is further heightened as a result.